Greece will cost us all

Now we wait and see what policy makers deliver us. Fear of the unknown has made many begin to lose some of this weeks risk appetite. Capital markets continue to wait for the transparent transcript from EU policy makers on what’s to be done in ‘times like these’. There is no precedent. Until then, despite the status quo, the dollar is a safer bet.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

The script remains the same. We wait for the fall out of Greece, we heed the ‘not one EURO’ rhetoric from Germany and all the while global fundamentals continue to trend in the right direction for equities. Yesterday, we saw US housing starts and industrial production increase more than expected last month, adding to the pile of evidence that the world’s largest economy’s growth is accelerating. Excelling corporate profits continue to surprise analyst’s expectations, thus providing speculators reasons to drag global bourses ever higher. Is it too far too soon? Currently, it’s very painful to bet as a contrarian in these markets when an unprecedented worldwide recovery is going on.

The Fed minutes fallout yesterday afternoon has given investors something to think about in these range bound forex markets. We witnessed a split in ideology amongst voting members, where several members want to begin selling securities sooner rather than later so as to reduce the Fed’s helping of the financial system. Their belief, with the economy finding traction, it’s time to eliminate some of the dependency. Immediate reaction saw US yields tentatively back up. The minutes showed that officials ‘remain positive about the economy’s prospects’, despite the worrying elevated unemployment rate, which is expected to hold steadfast at or near +9.7% for the remainder of the year. Finally, the market is getting a glimpse of the Fed’s thinking ‘on how best to withdraw the extraordinary stimulus it has provided’. The meeting revealed substantial disagreement amongst officials on ‘the timing and sequencing of exit steps’. The two camps of thought, one leaning towards the sale of assets to ensure that their ‘balance sheet shrinks more quickly’ and the other ‘nervous that these mortgage sales will drive yield higher’ indicates that consensus remains somewhat questionable. For us lay individuals to interpret, we are still several meetings away from a rate change.

The USD$ is currently is higher against the EUR -0.35%, GBP -0.40%, CHF -0.26% and lower against JPY +0.32%. Yesterday, the loonie backed off from this month’s highs but remains well contained in a tight trading range. Little volume and no momentum allowed the currency to shy away from the month’s strongest print despite equities and commodities crawling into positive territory. It seems that the Forex asset class does not exude the same optimism as commodities and equities. Yesterday, in early morning trading, the CAD strengthened on the back of US data showing that work had began on +591k houses at an annualized rate of +2.8% in Dec. Strength by association. On a cross related basis, the currency has outperformed all of its major trading partners. Whether it’s an increased risk appetite or acting as a surety currency, the loonie by default has remained well sought after year-to-date. Other data yesterday showed that Canada’s wholesale sales rose +0.7% in Dec. after a revised gain of +2.7% the previous month. Technical analysts expect to see consolidation at these elevated prices until capital markets get to witness a strong transparent message from the EU on the woes of sovereign debt. For speculators, the ‘trend remains your friend’. The old adage of ‘buy the rumor sell the fact’ tends to be a good percentage bet.

The AUD rallied to its strongest point earlier this week after the RBA said that further ‘increases to the benchmark interest rate are likely if the economy improves’ (3.75%). The currency happened to gain for a third consecutive day after Governor Stevens said in their last meeting ‘that their decision to keep borrowing costs on hold was finely balanced as they needed time to monitor events overseas’. The rhetoric looks like its giving the green light to Capital Markets to expect another hike as early as next month. So far, the futures market is pricing in a 40% chance of a hike during the Mar. meeting. The currency has managed to pare some of this weeks gains as the USD increased after reports showed the world’s biggest economy is improving and that Fed is somewhat debating the unwinding stimulus measures. On pull backs, expect better buying of the currency (0.8980).

Crude is lower in the O/N session ($76.64 up -67c). Crude was little changed yesterday despite the dollar climbing vs. the EUR, equities advancing on higher than expected earnings and US economic data signaling that the global recovery is gaining momentum. Similar to other asset classes, capital markets remain ‘in a wait see trading range’, with no strong conviction either way. Already this week, we witnessed, in one trading session, crude advancing the most in more than 4-months when the greenback struggled. Now that the dollar seems to have found its ‘head’, wanting a retracement does not seem to be on any ones lips. This morning we will take our cue from the weekly inventory reports. Last week’s bearish EIA headline print, coupled with reports that China is taking further steps to cool its economy, did little to impede the black-stuff’s rise. The delayed weekly EIA report, finally introduced last Friday, showed that crude supplies climbed +2.42m barrels to +331.4m (the highest level in 2-months) vs. an anticipated inventory rise of +1.6m barrels. The gas sub-category increased +2.32m barrels to +230.4m, w/w. In contrast, distillate stockpiles (heating oil and diesel fuel) lost -356k barrels to +156.2m vs. an expected drop of -1.55m barrels that was forecasted. Depending on equities and investors on again off again risk appetite, today’s expected inventory build up should technically put pressure on the black-stuff.

Lack of conviction, enthusiasm and volume had speculators locking in hard earned profits accumulated during this weeks gold rally. In the grand scheme of things, concerns about deepening EU deficits becoming contagious should continue to support the yellow metal on deeper pull backs. Already this week, the commodity managed to rally to a 3-month high on speculation that concern over Greece’s sovereign debt will spur demand for the ‘precious metal’ as an alternative to holding a currency. Investors believe that with so many sovereign-debt problems and too many Cbanks printing money, gold is the only hard asset they want. As long as investors fear a Greek default that could spark a wider European debt crisis, the commodity remains coveted. However, the IMF said yesterday that they will shortly begin on-market sales of 192 tonnes of Gold. This could dampen the bull’s mood ($1,106).

The Nikkei closed at 10,335 up +29. The DAX index in Europe was at 5,669 up +21; the FTSE (UK) currently is 5,302 up +26. The early call for the open of key US indices is lower. The US 10-year note backed up 3bp yesterday (3.71) and are little changed in the O/N session. Ok, let’s take Goldman’s out the equation for now. US treasuries attempted to back up yesterday after US reports showed that industrial production and housing starts rose last month. With global equities clawing their way higher on weak renewed optimism forced treasuries to retrace some of yesterday’s late gains. Technically, we are in a ‘wait-and-see’ mode, with all of our attention on Europe and the developments with Greece. Again, Goldman may be pulling the strings.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell